Our Workday Stock Prediction In 2019 (Buy or Sell?)
The late British futurist Arthur C. Clarke once observed that “any sufficiently advanced technology is indistinguishable from magic.” Clarke wrote the novel 2001: A Space Odyssey and co-wrote the screenplay of the 1968 movie version.
More than 50 years ago, Clarke predicted many technologies we now take for granted, such as cloud computing.
In the consumer realm, smartphone and other mobility devices offer a variety of cloud-based apps and private storage. However, the line between the private individual and the business enterprise is increasingly blurred. Employees expect 24/7 access to corporate resources, from anywhere in the world, at instantaneous speed.
One company that’s riding this technological revolution is software vendor Workday (NSDQ: WDAY), a provider of cloud-based enterprise solutions. Workday has seen its stock soar as cloud demand explodes.
Below, I examine the pros and cons of Workday as a company and whether the stock will maintain momentum, or lose its magic, in 2019.
What Is Workday?
With a market cap of $41.2 billion, Workday is a major provider of enterprise cloud applications for finance and human resources worldwide.
Based in Pleasanton, California, Workday develops and markets applications for customers to manage critical business functions. Among the company’s applications:
Workday Financial Management, which provides such functions as general ledger, accounting, accounts payable and receivable, cash and asset management; Workday Human Capital Management, which includes human resources management, and employee benefits administration; Workday Financial Performance Management; Workday Learning; Workday Payroll; Workday Time Tracking; and Workday Recruiting.
The company’s products serve clients from small to large, in every major business sector.
How Has Workday’s Stock Performed?
Workday has consistently crushed the broader stock market, as cloud use booms and investors jump onto the bandwagon.
- Over the past 12 months, WDAY has gained 52.5% whereas the S&P 500 has gained 4.7%.
- Over the past two years, WDAY has gained 128.8% whereas the S&P 500 has gained 18.1%.
- Over the past five years, WDAY has gained 85.2%, the S&P 500 has gained 49.2%, and the benchmark Technology Select Sector SPDR ETF (XLK) has gained 95.8%.
How Has Workday Performed In 2017/2018?
- In 2017, WDAY gained 51.7% whereas the S&P 500 gained 19.4%.
- In 2018, WDAY gained 54.4% whereas the S&P 500 lost 7.5%.
Who Are Workday’s Rivals?
The cloud is generating fierce competition among its providers. Let’s look at three of Workday’s biggest direct competitors in enterprise cloud computing.
Salesforce (NSDQ: CRM)
Salesforce is a $125.8 billion market cap firm that provides enterprise cloud computing solutions focused on customer relationship management (CRM).
The firm’s Service Cloud product provides companies with the ability to deliver personalized customer service and lets companies connect agents, dispatchers, and mobile employees through a centralized platform. This technology allows businesses to track and manage specific jobs in real-time.
Marketing Cloud is a tool for businesses to personalize, plan, and optimize customer marketing interactions. Sales Cloud stores data, monitors leads, predicts opportunities, and offers various insights using analytics intelligence.
Oracle (NSDQ: ORCL)
Data base provider Oracle (market cap: $188.4 billion) has become a dominant brand name in cloud computing.
Oracle makes money from the cloud in two main ways. It sells access directly to applications, but it also provides tools to program and manage apps while analyzing data (its “platform” service).
This tech giant has successfully transitioned away from its former core offering of installed software to embrace the bonanza in cloud computing.
SAP (NYSE: SAP)
SAP (market cap: $130 billion) makes products that support business intelligence and analytics. SAP gives businesses advanced platforms that can analyze and process live data, especially as data arrives from different sources.
The company mostly serves Global 1000 companies that are geared towards operations in databases, enterprise resource planning, and financial software. SAP’s products permit extensive customization, for the creation of inventory and sales management systems.
These three companies are major rivals to Workday but the list is far from exhaustive.
Will Workday Go Up In 2019 (Should You Buy)?
Many investors think they know what “the cloud” means. The term has become a ubiquitous buzzword. But I bet, if you pulled an average investor aside and said: “Define ‘the cloud’ to me,” you’d get blank stares or a lot of stammering.
So, before we get to Workday’s growth prospects, this video provides a fast tutorial on the cloud. Remember the old Wall Street adage: only invest in what you understand.
In a broad sense, cloud computing refers to the accessing of data or applications on remote servers via the Internet. That’s different from the traditional model of local computing, where you access most of your resources either on your own machine or through your company’s internal network.
InfoWorld defines the cloud this way:
Cloud computing comes into focus only when you think about what IT always needs: a way to increase capacity or add capabilities on the fly without investing in new infrastructure, training new personnel, or licensing new software. Cloud computing encompasses any subscription-based or pay-per-use service that, in real time over the Internet, extends IT’s existing capabilities.
Cost savings are a key benefit to moving to a cloud-based model. Cloud computing can also reduce IT glitches that lower productivity.
The cloud has been a game-changer, compelling major tech companies to alter their business models to embrace the offering of cloud services.
The stakes are huge. The global cloud computing market is forecast to reach $411 billion in annual revenues by 2020, according to a report from telecom CenturyLink (NYSE: CTL) and research firm Statista. Today the global cloud computing market is worth $180 billion in vendor revenues.
It all adds up to multi-year tailwinds for established enterprise cloud provider Workday, which has carved out a niche as a trusted brand name for business clients.
Will Workday Go Down In 2019 (Should You Sell)?
Let’s give the bears a fair hearing.
Rising geopolitical tensions, tit-for-tat tariffs, slowing global growth, political dysfunction in Washington, rising interest rates, stirring inflation, a looming U.S. recession — a glance at the headlines shows that the stock market is vulnerable for a tumble.
We endured a brutal fourth-quarter 2018 in the stock market. Year-to-date, the market has nearly recovered all of its lost ground. But investors remain complacent about trade tensions and provocations from countries such as China, Russia and North Korea. We probably face further sell-offs in 2019 and large-cap technology stocks will take the brunt.
What’s more, the market is transitioning from momentum growth stocks toward value plays. With worsening risks in the market, now’s not the time to climb aboard technology “story stocks” that have already enjoyed big gains.
Overall Workday Forecast And Prediction For 2019
I’d like to side with the bulls over Workday, but I can’t. Sure, Workday occupies a booming industry, with an entrenched customer base around the world. But the stock is overpriced and alas, the company is losing money.
Workday’s forward price-to-earnings ratio (FPE) is 85.97, which is high compared to Salesforce (59.83), and astronomical compared to Oracle (14.35), SAP (18.18), and the S&P 500 (17.52). Wall Street projects that Workday’s year-over-year earnings growth this year will come in at about 20%, a healthy figure but well short of anything that justifies its FPE.
The company on February 28 posted mixed fourth-quarter and full-year fiscal 2019 operating results.
For fiscal year 2019, the company posted total revenues of $2.82 billion, up 31.7% on a year-over-year basis. Subscription revenue reached $2.39 billion, a year-over-year increase of 33.4%
Workday management upped their guidance for fiscal 2020 subscription revenue and now expects revenue between $3.03 billion and $3.04 billion. Wall Street was expecting $3.02 billion.
That’s the good news. The bad news is, Workday posted losses in the fourth quarter and the full year, due to higher costs. And those losses have been widening on a year-over-year basis.
The net loss in the fourth quarter per diluted share was $0.47, compared to a net loss of $0.42 in the fourth quarter of fiscal 2018. The net loss in fiscal 2019 per diluted share was $1.93, compared to a net loss per diluted share of $1.55 in 2018.
In this increasingly risky investment climate, I can’t advise you to purchase the excessively valued stock of a tech company that’s been consistently losing money.
When a company’s losses are widening but its stock continues to trade at nosebleed valuations, you don’t have to be Arthur C. Clarke to predict what eventually happens.
John Persinos is the managing editor of Investing Daily.